Monday, January 11, 2016

Of Pipe Dreams And Nightmares . . . Of South Dakota Sales Tax Reform

A Ripoff?We Need To Look At This(photo from legalzoom.com)

Some serious bucks are slipping through the fingers of South Dakota residents thanks to a generous allotment of sales tax exemptions. Considering that around 80% of our state's tax revenues come from sales and use taxes, which amounted to about $1.2 billion in 2014, it's amazing to me that we leave nearly that much on the table by a pretty darn liberal distribution of exemptions amounting to nearly $1 billion in 2015. I hope you'll take the time to review this eye-poppingly long list of exemptions and ask yourself if there is some way it can be pared down to a point where a serious amount of those exempted potential revenue sources can be harnessed and put to work in our state.

After going through the list myself I'm actually pretty dismayed. As I've noted here in the past, I find a lot of these exemptions to be outdated and outrageous. About a third of the exemptions ($350 million) are given to the "Agriculture Group," many of which look more like handouts than reasonable recognitions of the fact that many of the sales (feed, fertilizer and livestock, for example) are effectively wholesale in nature. Those should be exempted. But I have reason to question some others: while I have to pay sales tax from my business to mechanics, fuel providers and insecticides, ag producers don't. Those three exemptions alone total almost $60 million a year. Farmers and ranchers are businesspeople like everybody else and their forays into the retail markets for operating supplies and services on a sales tax-free basis makes no sense to me. My biz is as integral a part of South Dakota's economy as theirs. For example, I get mechanics to work on my equipment just like a farmer does. Why should that farmer get a tax break that I don't get? And now that I bring it up, I'm wondering about some of the exemptions allowed in a couple of groups much closer to my personal home. Consider the "Business Group." Advertising agencies don't have to charge sales tax on their services, exempting them from nearly $20 million a year in collections for the state. Meantime, commodity brokers in the "Financial Group" don't have to charge up to $7 million worth of sales taxes. Insurance company agents don't collect $3.5 million for their products and services. Even rodeo clowns get a break, not having to charge rodeos for their services. I'd like to know how the rodeo clown lobby packs enough clout to get that tax break, lol. There are more. It's a long list, worthy of review. My friend Cory Heidelberger suggests in his

Not PrettyTax Reform Might Help(table from itep.org)

blog Dakota Free Press that sales tax reform should be on the legislative agenda, which of course is the "pipe dream" I alluded to in the title. Doing that would, after all, instigate the "nightmare" for special interest groups that have had a long-standing position in the exempted class. But given the tightness of money in this state that could be dedicated to improving teacher salaries and funding infrastructure repair, a comprehensive examination of the exemptions is long overdue. People and businesses who are spared from paying sales taxes are gaining just as much benefit from the services that sales taxes provide as the rest of us. I think there's room for spreading out the obligation and helping out with the state's fiscal challenges.

5 comments:

Not sure how authoritative it is, anonymous, but I did once read a recap by a former editor of the Watertown Public Opinion who said sales taxes were first imposed in SD during the 1930s as residents began demanding more and more services from government. That was such a tough time for farmers that they probably had little or nothing to pay taxes with in the first place, and since urban dwellers were most dependent on government services the tax burden was probably directed at them. I believe the "cheap food" policy has more national origins and historically has come in the form of federal subsidies. If readers have a different take on all this, I invite them to share their knowledge here, as I by no means claim any particular expertise in the history of SD tax policy.

Insurance companies don't charge sales tax, but they pay a "premium tax" to the state, which is one of the state's biggest revenue generators. It's essentially an income tax on insurance companies - which is charged in lieu of a sales tax. Likewise, banks pay the "bank franchise tax" which is essentially an income tax on banks. Let it not be said that SD doesn't have an income tax. It's just a limited one on banks and insurance companies.

Appreciate the catch, Anonymous. I shouldn't have lumped insurance companies with their agents and made the appropriate edit. I know about the bank franchise tax so I left them out of the piece altogether.

About Me

I'm a businessman and writer living in the Black Hills of South Dakota. I've written articles and commentary for 25+ years. I was a member of the Chicago Board Options Exchange and the founder of a futures brokerage firm for a total of twenty years and I own commercial real estate in western South Dakota. I served three years ('66-'69) in the U.S. Marine Corps, including a 13-month tour of duty in Vietnam as a radioman. My wife and I have two grown daughters. We make our home in Rapid City, South Dakota